Quantitative easing is not the Titanic

While last week's US midterm elections continue to be dissected on both sides of the Atlantic, less attention was paid to the Federal Reserve's decision to embark on a second round of quantitative easing, even though this may have a greater impact on the US economy. Those who have focused on the Fed's decisions have been generally critical, the former Reagan administration official David Stockman calling it "pure monetary heroin" and other pundits predicting that it will spark a global trade war. That noted monetary policy expert, Sarah Palin, has even taken a break from her reality TV show to conjure up fears of hyperinflation, a worthless dollar and a situation where the Federal Reserve becomes "not just the buyer of last resort, but the buyer of only resort".

On one level, people are right to be sceptical. The Bush administration argued in 2008 that only drastic action could prevent depositors from losing their money and firms' temporary lines of credit drying up, claims that the Federal Reserve Bank of Minneapolis debunked in a study days after the bailout was finally agreed. Similarly, the purchase of $1.25trn worth of mortgage securities in early 2009 failed to prevent the rate of growth of broad money (M3) falling into negative territory this summer.

However, by purchasing long-term government bonds, which are more likely to be held by households and non-financial corporations than mortgage securities, a greater proportion of the monetary stimulus will find its way directly into the money supply, rather than relying on increased lending. This in turn should boost economic demand and prevent deflation, which is a very real possibility and would delay the process of economic recovery. That the intervention will involve the purchase of a low-risk asset, instead of securities of uncertain value, will reduce the risk of losses to the US Treasury without further rewarding those who lent and invested recklessly.

Even the warnings from the World Bank that the intervention will lead to a weaker dollar are disingenuous. Since the mid-1970s America has run a continuous trade deficit, importing more goods and services than it exports. This deficit, and the consequent borrowing that was used to cover for it, have now been recognised as one of the main causes of the financial crisis, making a solution imperative for America's long-term future.

Because the only other alternatives are deflation, which would further increase unemployment, and protectionism, which could spark a trade war that could tip the world back into recession, letting the dollar slide is the only plausible solution. Worryingly, protectionist sentiment continues to grow, with a poll conducted in September showing that 69 per cent of Americans believe that free-trade agreements destroy more jobs than they create.

Of course, some risks still remain. While an increase in the money supply is needed to speed recovery and prevent deflation, too great an injection will be inflationary. It is also important to make sure that the Federal Reserve sticks to purchasing government bonds from households and consumers, rather than reintervening in the mortgage market or buying securities from banks or financial institutions (which would only increase the monetary base).

The Federal Reserve needs to increase transparency by publishing the basic broad monetary aggregates that other central banks compile, including those that it discontinued in 2006, rather than forcing economists to rely on composites produced privately. There is also the question of why it has taken Bernanke so long to arrive at a solution that would have avoided much of the cost, moral hazard and public anger generated by the bailouts.

Matthew Partridge is a freelance journalist and a PhD student at the London School of Economics.

Hannan Fodder: This week, Daniel Hannan gets his excuses in early

Since Daniel Hannan, a formerly obscure MEP, has emerged as the anointed intellectual of the Brexit elite, The Staggers is charting his ascendancy...

When I started this column, there were some nay-sayers talking Britain down by doubting that I was seriously going to write about Daniel Hannan every week. Surely no one could be that obsessed with the activities of one obscure MEP? And surely no politician could say enough ludicrous things to be worthy of such an obsession?

They were wrong, on both counts. Daniel and I are as one on this: Leave and Remain, working hand in glove to deliver on our shared national mission. There’s a lesson there for my fellow Remoaners, I’m sure.

Anyway. It’s week three, and just as I was worrying what I might write this week, Dan has ridden to the rescue by writing not one but two columns making the same argument – using, indeed, many of the exact same phrases (“not a club, but a protection racket”). Like all the most effective political campaigns, Dan has a message of the week.

First up, on Monday, there was this headline, in the conservative American journal, the Washington Examiner:

“We will get a good deal – because rational self-interest will overcome the Eurocrats’ fury”

The message of the two columns is straightforward: cooler heads will prevail. Britain wants an amicable separation. The EU needs Britain’s military strength and budget contributions, and both sides want to keep the single market intact.

The Con Home piece makes the further argument that it’s only the Eurocrats who want to be hardline about this. National governments – who have to answer to actual electorates – will be more willing to negotiate.

And so, for all the bluster now, Theresa May and Donald Tusk will be skipping through a meadow, arm in arm, before the year is out.

Before we go any further, I have a confession: I found myself nodding along with some of this. Yes, of course it’s in nobody’s interests to create unnecessary enmity between Britain and the continent. Of course no one will want to crash the economy. Of course.

I’ve been told by friends on the centre-right that Hannan has a compelling, faintly hypnotic quality when he speaks and, in retrospect, this brief moment of finding myself half-agreeing with him scares the living shit out of me. So from this point on, I’d like everyone to keep an eye on me in case I start going weird, and to give me a sharp whack round the back of the head if you ever catch me starting a tweet with the word, “Friends-”.

Anyway. Shortly after reading things, reality began to dawn for me in a way it apparently hasn’t for Daniel Hannan, and I began cataloguing the ways in which his argument is stupid.

Problem number one: Remarkably for a man who’s been in the European Parliament for nearly two decades, he’s misunderstood the EU. He notes that “deeper integration can be more like a religious dogma than a political creed”, but entirely misses the reason for this. For many Europeans, especially those from countries which didn’t have as much fun in the Second World War as Britain did, the EU, for all its myriad flaws, is something to which they feel an emotional attachment: not their country, but not something entirely separate from it either.

Consequently, it’s neither a club, nor a “protection racket”: it’s more akin to a family. A rational and sensible Brexit will be difficult for the exact same reasons that so few divorcing couples rationally agree not to bother wasting money on lawyers: because the very act of leaving feels like a betrayal.

Problem number two: even if everyone was to negotiate purely in terms of rational interest, our interests are not the same. The over-riding goal of German policy for decades has been to hold the EU together, even if that creates other problems. (Exhibit A: Greece.) So there’s at least a chance that the German leadership will genuinely see deterring more departures as more important than mutual prosperity or a good relationship with Britain.

And France, whose presidential candidates are lining up to give Britain a kicking, is mysteriously not mentioned anywhere in either of Daniel’s columns, presumably because doing so would undermine his argument.

So – the list of priorities Hannan describes may look rational from a British perspective. Unfortunately, though, the people on the other side of the negotiating table won’t have a British perspective.

Problem number three is this line from the Con Home piece:

“Might it truly be more interested in deterring states from leaving than in promoting the welfare of its peoples? If so, there surely can be no further doubt that we were right to opt out.”

I could go on, about how there’s no reason to think that Daniel’s relatively gentle vision of Brexit is shared by Nigel Farage, UKIP, or a significant number of those who voted Leave. Or about the polls which show that, far from the EU’s response to the referendum pushing more European nations towards the door, support for the union has actually spiked since the referendum – that Britain has become not a beacon of hope but a cautionary tale.

But I’m running out of words, and there’ll be other chances to explore such things. So instead I’m going to end on this:

Hannan’s argument – that only an irrational Europe would not deliver a good Brexit – is remarkably, parodically self-serving. It allows him to believe that, if Brexit goes horribly wrong, well, it must all be the fault of those inflexible Eurocrats, mustn’t it? It can’t possibly be because Brexit was a bad idea in the first place, or because liberal Leavers used nasty, populist ones to achieve their goals.

Read today, there are elements of Hannan’s columns that are compelling, even persuasive. From the perspective of 2020, I fear, they might simply read like one long explanation of why nothing that has happened since will have been his fault.

Jonn Elledge is the editor of the New Statesman's sister site CityMetric. He is on Twitter, far too much, as @JonnElledge.